Job Costing & ABC costing


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Job Costing & ABC costing

  1. 2. <ul><li>In a Business Organization, Activity-based costing (ABC) is a method of allocating costs to products and services. It is generally used as a tool for planning and control. </li></ul><ul><li>The concept of ABC was developed in the manufacturing sector of the United States during the 1970s and 1980s </li></ul><ul><li>ABC acknowledges that you cannot manage costs, you can only manage what is being done and then costs will change as a consequence </li></ul>
  2. 3. BASICS OF A B C <ul><li>Cost of a product is the sum of the costs of all activities required to manufacture and deliver the product. </li></ul><ul><li>Products do not consume costs directly </li></ul><ul><li>Money is spent on activities </li></ul><ul><li>Activities are consumed by product/services </li></ul>
  3. 4. <ul><li>ABC assigns Costs to Products by tracing expenses to “activities”. Each Product is charged based on the extent to which it used an activity </li></ul><ul><li>The primary objective of ABC is to assign costs that reflect/mirror the physical dynamics of the business </li></ul>BASICS OF A B C
  4. 5. PURPOSE <ul><ul><li>Allocation of indirect costs based on causal activities </li></ul></ul><ul><ul><li>Attempts to identify “direct” link between cost and cost object </li></ul></ul><ul><ul><li>Results in better allocation </li></ul></ul><ul><ul><li>Does not provide “true” cost </li></ul></ul>
  5. 6. USES <ul><li>It helps to identify inefficient product, department and activity </li></ul><ul><li>It helps to allocate more resources on profitable product, department and activity </li></ul><ul><li>It helps to control the cost at individual level and on departmental level </li></ul><ul><li>It helps to find unnecessary costs </li></ul>
  6. 7. <ul><ul><li>Form cost pools </li></ul></ul><ul><ul><li>Identify activities </li></ul></ul><ul><ul><li>Map resource costs to activities </li></ul></ul><ul><ul><li>Define activity cost drivers </li></ul></ul><ul><ul><li>Calculate cost </li></ul></ul>STEPS
  7. 8. Activities: Types <ul><li>Unit level: Performed each time a unit is produced </li></ul><ul><li>Batch level: Performed each time a batch is produced </li></ul><ul><li>Product level: Performed to support production of different type of product </li></ul><ul><li>Customer Level: Performed to support servicing customers </li></ul><ul><li>Facility level:Residuary head </li></ul>
  8. 9. <ul><li>Activity drivers that keep track of how cost object behaviour influences activity levels, i.e., the level of activity for each activity.  </li></ul><ul><li>Resource drivers that keep track of how the subsequent activity level affects the resource consumption. </li></ul>DRIVERS While we discuss drivers it is important to mention that in ABC there are two types of drivers w.r.t. cost assignment:
  9. 10. IMPLEMENTING ABC <ul><li>Step 1 – Plan the system </li></ul><ul><ul><li>What are the goals? </li></ul></ul><ul><ul><ul><li>Inventory valuation </li></ul></ul></ul><ul><ul><ul><li>Process improvement </li></ul></ul></ul><ul><ul><li>Foster active involvement </li></ul></ul><ul><ul><li>Assemble cross-functional team </li></ul></ul><ul><ul><ul><li>Functional specialists </li></ul></ul></ul>
  10. 11. Implementing ABC <ul><li>Step 2 – Define, analyze activities and resources </li></ul><ul><ul><li>Decompose organization into elemental activities </li></ul></ul><ul><ul><ul><li>Who does what, and why? </li></ul></ul></ul><ul><ul><ul><ul><li>Interview employees </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Determine resources </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Determine inputs and outputs </li></ul></ul></ul></ul><ul><ul><li>Gather statistics on activities </li></ul></ul><ul><ul><ul><li>Inputs and outputs </li></ul></ul></ul><ul><ul><ul><li>Transaction, duration, intensity </li></ul></ul></ul><ul><ul><ul><li>For possible use as second-stage cost drivers </li></ul></ul></ul>
  11. 12. Implementing ABC <ul><li>Step 3 – Establish activity cost pools and determine first stage allocation </li></ul><ul><ul><li>First stage allocations assign costs to cost pools </li></ul></ul><ul><ul><ul><li>Requires costs to be re-categorized according to why they are incurred, not by type </li></ul></ul></ul><ul><ul><ul><li>Drivers may be employee time, square footage, etc. </li></ul></ul></ul>
  12. 13. Implementing ABC <ul><li>Step 4 – Determine second stage drivers and assign costs to cost objects </li></ul><ul><ul><li>Outputs of activity analysis may be second stage drivers </li></ul></ul><ul><ul><ul><li>Distance moved, times handled, machine hours, units, etc. </li></ul></ul></ul><ul><ul><li>Amount assigned to the cost object is the amount of activity consumed times the rate per unit of the activity </li></ul></ul>
  13. 14. Activity-Based Costing <ul><li>Traditional allocation method </li></ul><ul><li>Activity-based allocation method </li></ul>Costs Products Costs Products Activities First stage Second stage
  14. 15. BUILDING AN ABC MODEL Identify Resources Identify Activities Identify Cost Objects Define Resource Drivers Define Activity Drivers Enter Resource Costs Enter Resource Driver Qty. Enter Activity Driver Qty. Calculate Costs
  15. 16. ABC: WHERE TO USE? <ul><li>High Overheads </li></ul><ul><li>Product Diversity or Multiple Products </li></ul><ul><li>Customer Diversity </li></ul><ul><li>Complex products </li></ul><ul><li>Service Diversity </li></ul><ul><li>Stiff Competition </li></ul>
  16. 17. JOB COSTING Job costing is the process of tracking the expenses incurred on a job against the revenue produced by that job. Job costing is an important tool for those who are pairing a relatively high dollar volume per customer with a relatively low number of customers <ul><li>Job cost record is a document used to accumulate the costs of a job. </li></ul><ul><ul><li>Includes: Job Number, Customer Info, Job Description, Date Promised, Date Started, Date Completed, Materials, Labor, Overhead used and amounts, etc </li></ul></ul>
  17. 18. OBJECTIVES <ul><li>Distinguish between job costing & process costing </li></ul><ul><li>Trace materials and labor in a manufacturer’s job costing system </li></ul><ul><li>Allocate manufacturing overhead in a manufacturer’s job costing system </li></ul><ul><li>Account for completion and sales of finished goods and adjust for under- and over-allocated manufacturing overhead </li></ul><ul><li>Assign noninventoriable costs in job costing </li></ul>
  18. 19. <ul><li>There are numerous aspects to job costing, and you may use many, some or none of them. If you want to use job costing, you need to: </li></ul><ul><li>Track the costs involved in the job </li></ul><ul><li>Make sure all of the costs are invoiced to the customer </li></ul><ul><li>Produce reports showing details of costs and revenues by job </li></ul>COMPONENTS OF JOB COSTING
  19. 20. <ul><li>Quotes – also known as estimates, bids, or proposals </li></ul><ul><li>Fixed fee jobs </li></ul><ul><li>Time and materials jobs </li></ul><ul><li>Revenues </li></ul><ul><li>Items </li></ul><ul><li>Direct costs </li></ul><ul><li>Standard costs </li></ul>The fundamental components of job costing are:
  20. 21. Job Costing Approach <ul><li>1. Identify the cost object(s) </li></ul>Pages 110- 111 2. Identify the direct costs for the cost object(s) 3. Select cost-allocation bases to use in allocating the indirect costs to the cost object(s) 4. Identify the indirect costs associated with each cost-allocation base 5. Compute the rate per unit of each cost-allocation base to allocate indirect costs to the cost object(s) 6. Compute the indirect costs allocated to the cost object(s) 7. Determine the cost of the cost object(s) by adding the direct and indirect costs
  21. 22. Job Costing Approach 4 - Step 1: Identify the chosen cost object. Step 2: Identify the direct costs of the job. Step 3: Select the cost-allocation bases. Step 4: Identify the indirect costs.
  22. 23. Job Costing Approach 4 - Step 5: Compute the rate per unit. Step 6: Compute the indirect costs. Step 7: Compute the total cost of the job.
  23. 24. Job Costing System in Manufacturing <ul><li>Cost of </li></ul><ul><li>Goods Sold </li></ul>Finished Goods Inventory Work-In-Process Inventory Materials Inventory Buy Materials Use Materials Incur Labour Costs Incur Overhead Costs Complete Production Sell Goods Pages 118 - 124
  24. 25. Job Costing in the Service Industry <ul><li>Example: </li></ul><ul><li>Total budgeted direct labour costs $14,400,000 </li></ul><ul><li>Total budgeted indirect costs $12,960,000 </li></ul><ul><li>Total direct professional labour-hours 288,000 </li></ul>Pages 128 - 129 Budgeted direct labour rate = $14,400,000 / 288,000 = $50 per hour Budgeted indirect-cost rate = $12,960,000 / 288,000 = $45 per hour Cost of an Audit Direct labour ($50 per hour x 800 hours) $40,000 Indirect costs ($45 per hour x 800 hours) 36,000 Total cost $76,000